Are you interested in buying bank owned REO properties? I’ve laid out a very basic description of what an REO is, considerations before buying one and the general process to purchase one.
REO stands for ‘Real Estate Owned’ and is bank owned real estate. This can be a great opportunity for an investor. These properties have already gone through the foreclosure process. The bank has tried to sell the property at a public auction but was unsuccessful. Now the mortgage no longer exists and the bank has to take the property back.
Fortunately, you won’t have to go through the mortgage company now; you’ll deal directly with the bank. Any liens against the property will be taken care of by the bank and they are no longer a concern for the prospective investor.
Buying REO properties gives the buyer great leverage since they are often highly discounted and have the potential of bringing in a nice return if rehabbed and sold quickly. But you do want to be careful how you go about buying an REO. There may be a good reason why the property was not able to be sold at public auction. It’s your responsibility to make sure that this is still a good deal.
Banks want to sell these properties because they are not set up as property management companies. And often times they are penalized by the government for holding REO properties. They are losing a lot of money and will sell the properties very cheap if necessary. Often times up to 30% discounted or more.
The ball is in your court to make sure that the price of the property is truly worth paying. Compare the property with other similar properties in the neighborhood. This is called checking the comps. A real estate agent might be able to help you in this process. You would look for several properties in the neighbor hood with a similar age, construction and layout. You would want to see the average sale of similar houses to be much higher than what you are looking to pay for your REO property.
Be sure there is enough equity in the home. After doing repairs will there be about 30% equity in the property? At this point you don’t want this to be an average priced property. You are looking for a deep discount.
Look for major repairs that might make it a poor investment. The bank is most likely selling their REO’s “as is.” That means that if there are major repairs on the property, you will be responsible to fix them. That is why you should be sure to inspect the home. If you do not have experience in this area it is advisable that you hire a professional to check out the home with you.
The bank will most likely see you as more serious if you request an opportunity to do such an inspection. If you do find something wrong, don’t expect the bank to repair it. Of course, it couldn’t hurt to ask since they are trying to get rid of the property. Regardless, REO homes almost always need repair. Even if you do not find something major, there will be minor repairs such as carpeting, paint and perhaps windows to replace. If you are looking to fix it up and sell it be sure to understand the costs involves for repairs. Be sure to factor those costs into the purchase price.
Also consider the time it will take to do the renovations. There are monthly costs you will have to incur while you are renovating the property. These are called holding costs. Be sure that your property is in an area that it will sell. If not you might want to consider rent options. Location is important!
When considering purchasing an REO it is helpful to understand that banks want to get the best price they can get for the home. They also have to consider costs they must bear each month they hold onto the property. There is usually a bank REO department that will deal specifically with these properties.
You will make an offer to the bank. The bank will most likely make a counter offer. Their offer will most likely be higher than you expect. They must demonstrate to their company that they attempted to get the best price. At that point you will make a counter offer to the bank. When you get to that point expect the bank to take a while to respond to your offer since there is likely to be several levels of approval the offer must go through.
Offers are usually faxed back and forth between parties. And as much as you might be excited and anxious to get a reply be aware that bank hours do not include evenings or weekends.
Be sure to include contingencies in your offer so that you will have a time period to thoroughly go through the property and reject the offer if something major is discovered.
The REO sales process can be both exciting and frustrating. Be patient and do your due diligence. Solid REO sales are good for both you and the bank. They are getting debt off of their hands, and if you know what you are doing, you will be getting a great investment deal.